An oversupplied oil market has finally taken a turn for the better, according to one of Wall Street’s most prominent investment banks and crude-oil bears.

Helped by strong demand and sharp declines in production, the oil market has shifted from “nearing storage saturation to being in deficit much earlier than we expected,” wrote a team of analysts led by Damien Courvalin and Jeffrey Currie at Goldman Sachs, in a Sunday research note.

Goldman sees a nearly balanced market in 2Q15 and smaller draw in 2H16

With that, the analysts now expect West Texas Intermediate crude to reach $45 a barrel in the second quarter, compared with the $35 it predicted in March. The bank also has increased its outlook for the second half of the year to $50 a barrel from $45 a barrel in March.

For its 2017 forecast, Goldman is predicting WTI will go no higher than $45 a barrel in the first quarter, compared with the $55 a barrel it predicted two months ago. But the analysts expect oil will gradually reach $60 a barrel by the fourth quarter of next year, and that’s up from a March forecast of $55 a barrel.

Goldman, which has been fairly bearish on oil markets, credits that shift to a variety of factors, such as low prices causing disruptions in Nigeria, a rise in Iranian production and better demand.

Crude prices rallied after that bullish call on Monday. WTI
CLM26, -49.79%
rose $1.52, or 3.3%, to $47.75 a barrel, and Brent crude
UK:LCON6
jumped $1.52, or 3.2%, to $49.35 a barrel.

Goldman said the market “has likely shifted into deficit in May,” after a first quarter of surprise gains in supply and demand. The note described it as “a sudden halt to the oil market surplus.”

“The [second-quarter 2016] deficit that we now forecast is occurring one quarter earlier than we expected mid-March, driven by both sustained strong demand as well as sharply declining production,” the analysts said.

However, the Goldman team said increased Iraq and Iran production could more than offset disruptions out of Nigeria and the bank’s higher demand forecast. They expect a more gradual decline in inventories in the second half than previously, and see the oil market returning to surplus in the first quarter of 2017.

Goldman said while the physical rebalancing has started, the structural imbalance in capital markets remains huge, with $45 billion of equity and bond issuance taking place in the U.S. this year. “As a result, we believe that the industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to $60/bbl,” said Goldman analysts.

As for the return to surplus in 2017, Goldman analysts said it isn’t dependent on a sharp price recovery beyond the $45 to $55 a barrel trading range that can now be expected this year. That surplus is more dependent on low-cost producers continuing to drive production growth in what they termed the “New Oil Order“— growth driven by Saudi Arabia, Kuwait, Iran, the United Arab Emirates and Russia.

As well, producers which aren't a member of the Organization of the Petroleum Exporting Countries had mostly budgeted that price level and there is a “pipeline of already sanctioned non-OPEC projects, said Goldman. In fact, the analysts see risks to their production forecasts as “skewed to the upside” owing to their conservative views on the Saudi’s inescapable ramp up and Iran’s recovery.

The analysts reminded that the recovery in prices will be gradual this year, because of significant inventory overhang and high uncertainty on forward balances. But a rally for prices, they say will ultimately be driven by the pace of inventory.

Case in point: last week’s report from the Energy Information Administration posted a 3.4 million-barrel fall in stockpiles, and oil prices rallied to a more than six-month high.

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